With Sprint out of the picture, American Tower faces a near-term drop in growth due to churn, with 2022 being the year when a majority of its Sprint-related churn will hit its bottom line. So, why not look beyond that timeframe?
That’s what the company did when announcing its fourth-quarter results this week, projecting 2023-2027 net domestic organic tenant billings growth in the 5% range, with overseas growth at least 2% higher than in the U.S. and Canada through 2027.
“In 2022, yes, there is going to be that drop of T-Mobile churn that we’re going to see, we know what it is. We’re working on opportunities now, to be able to mitigate a lot of that as we go into 2022,” President and CEO Tom Bartlett said during the company’s earnings conference call on Thursday. “We’re all hoping that we’re going to be able to improve on that for 2021, particularly as we bring on the kind of Telxius transaction… No doubt that the T-Mobile Sprint churn is a large item for us that we need to address. But our teams are working on it diligently right now, and we’re trying to work through that.”
American Tower announced in January that it's buying Telefónica’s tower business, Telxius Towers, for about $9.4 billion. Telefónica will continue to use the towers, leasing them from American Tower, which will also market the towers to new tenants as a neutral host.
While the merger of Sprint with T-Mobile eliminated a customer for the tower companies, they’re expected to reap the benefits of new 5G spectrum coming online. Noting the recent close of the C-band auction, American Tower CFO Rod Smith reiterated that executives there believe the majority of mid-band deployments will be on macro tower sites. “We are enthusiastic about the potential impact of these deployments on our U.S. and Canada growth, particularly in 2022 and beyond,” he said.
Last year, T-Mobile announced a new 15-year master lease agreement (MLA) with American Tower. However, American Tower has yet to announce anything with Dish Network, which has announced tower deals with Crown Castle, Vertical Bridge and others.
Bartlett said during the conference call that American Tower expects to get its fair share of business from Dish. “We stand ready to support Dish,” however it expects to roll out its network, he said. “We know the teams well.”
He was also asked about other opportunities with newer entrants. Cable companies could be in the mix, but it’s hard to say who’s looking to do what, including among the hyperscalers that might come into the marketplace. “We just don't know what we don't know relative to other players coming into the market,” he said. “We haven't included them, clearly, in any of our forecasts.”
From a financial perspective, fourth-quarter results were generally in line with or better than expected, but benefitted from elevated “other” revenue that was about $23 million higher than analysts at MoffettNathanson expected, according to a note for investors. EBITDA of $1,375 million was 3.8% ahead of consensus and 2.7% ahead of their estimate, wrote analyst Nick Del Deo.
But the main event was American Tower’s outlook, he said. “American Tower’s medium term growth outlook faces a disadvantage vs. its peers in that its Sprint-related churn is hitting sooner,” Del Deo wrote. “And it’s hitting hard: domestic organic tenant billings growth is expected to be about 3% in 2021 and just ~1% in 2022, when a majority of churn hits.”
On the other hand, “that a great share of its domestic revenue is fixed via master lease agreements arguably gives American Tower more visibility into its future growth than its peers, allowing it to provide an outlook over multiple years with greater specificity,” Del Deo said. “One can debate what, if anything, this means from a fundamental value perspective, but it could facilitate American Tower sharing a more optimistic narrative. And that’s exactly what it did.”
Raymond James & Associates lowered its target price on American Tower stock to $244, down from $258, to reflect guidance for 2021 and beyond. However, given American Tower’s more positive guidance for 2023-2027, their long-term thesis remains intact and they continue to believe in the long-term runway for U.S. site leasing, according analyst Ric Prentiss.
“T-Mobile's network integration, DISH's 5G network rollout to meet FCC/DoJ deadlines, and an increasing supply of mid-band spectrum (e.g., CBRS and C-Band recently, and 2.5 GHz and 3.4 GHz auctions in 2021) should lead to higher U.S. leasing growth, and we feel 2021 is the inflection point. But as gross leasing picks up heading into 2022, AMT gets hit with the bulk of its Sprint churn, so net organic growth should remain low through 2022 and pick up in 2023 and beyond,” Prentiss wrote.